Suze Orman AND Individual Municipal Bonds

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EMDW
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Suze Orman AND Individual Municipal Bonds

Post by EMDW » Sat Nov 16, 2013 9:24 pm

Suze Orman said on her show today to buy individual municipal bonds (not bond funds) through a good advisor as rates are around 5%. How does one pick a "good advisor" in this case? Someone on the show had an additional 100K to invest after her retirement account/debt were fulfilled. Please educate me on why this is good or not? I caught only part of this on the show.

linuxizer
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Re: Suze Orman AND Individual Municipal Bonds

Post by linuxizer » Sat Nov 16, 2013 9:28 pm

You will benefit from reading this:
http://www.bogleheads.org/wiki/Individu ... _Bond_Fund

And also from not listening to Suze Orman's bond investment advice. :-)

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Toons
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Re: Suze Orman AND Individual Municipal Bonds

Post by Toons » Sat Nov 16, 2013 9:34 pm

linuxizer wrote:You will benefit from reading this:
http://www.bogleheads.org/wiki/Individu ... _Bond_Fund

And also from not listening to Suze Orman's bond investment advice. :-)
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nedsaid
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Re: Suze Orman AND Individual Municipal Bonds

Post by nedsaid » Sat Nov 16, 2013 9:45 pm

The problem with individual bonds is that these are more complicated instruments than perceived by most investors. A family member bought individual issues and got burned on many of them. This family member had to be his/her own credit analyst and wound up calling me for advice.

Here are the pitfalls of individual issues:

1) Many bonds have call dates. So if a 20 year bond can be called in 5 years, you effectively have a five year bond. It all depends on if interest rates drop from where they are now. If rates stay the same or go higher, the 20 year bond won't be called. So it could be a 20 year bond or a 5 year bond depending on the direction of interest rates.

2) Most bonds trade through networks of bond brokers and not through exchanges. The pricing is not transparent. You not only have your commission but the buy/sell spread. Since many bonds are thinly traded, the spread can be more than you think. And you probably won't be told what the spread was. For example, when my grandfather died his portfolio of tax free bonds were sold. The family got about what my Grandfather paid for the bonds years earlier. Interest rates dropped while he owned them and you would have thought there would have been a profit on the sale of those bonds. Not so in this case.

3) The credit quality of the bonds you buy can deteriorate over time. My family member bought bonds in two companies that later went bankrupt. With municipalities, the threat of bankruptcy is less but credit quality can decline over time. Your broker is unlikely to closely monitor your bonds for credit quality, that will likely fall to you. Do you want to be your own credit analyst? Or you might see the price of your bonds drop and wonder why. We also know from the financial crisis that the bond ratings agencies did not do their jobs very well.

4) If you go to a full service brokerage house, you may not get objective advice. You may wind up getting sold stuff that the investment house doesn't want anymore. Why purchase someone else's problems? I suppose you would get more objective service with the bond desk at a discount broker. My family member had mixed experiences with his/her individual bonds in part, I suspect, because he/she may have been sold stuff from the firm's inventory. They knew about the problems down the road sooner than him/her and that might be why my family member got stuck with these issues.

5) Because of the costs of purchase (commissions and bid/ask spreads), individual bonds are best purchased in large dollar amounts. At a minimum, you would probably want $100,000 or more like $250,000 to consider buying individual issues.

Keep in mind that Suze Orman has been in the investment business for years. She is a wealthy woman. She knows the ins and outs of the bond market. Don't be an innocent sheep that gets fleeced by the investment firms.

I think for most investors interested in municipal bonds, use lower cost municipal bond funds. Vanguard and Fidelity would be great places to start.
A fool and his money are good for business.

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Artsdoctor
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Re: Suze Orman AND Individual Municipal Bonds

Post by Artsdoctor » Sat Nov 16, 2013 9:51 pm

You will not find high-quality munis that are yielding 5% quite yet, although their coupons will be paying 5% (yield to maturity/yield to call are different than the coupon).

A muni fund is usually the best option for the small investor but if you want to venture out to buy a few high-quality munis, and if you understand what you're doing, you can buy them at auction (no fees and no spreads).

However, I would caution you to make a good-faith attempt to understand the muni market. There are many really good books out there, including "The Bond Book." Vanguard also publishes papers from time to time on individual bonds versus bond funds. Before I'd purchase individual bonds, I'd read a bit.

The above poster's advice is sound, although you don't need to buy in blocks of $100,000 or more. When you do buy, anticipate holding them until they mature; you'll avoid the sad situation described above. And clearly, you will need to know the call features associated with the bond. If you, at some point, want to buy individual munis, start with the very safest (you will need to do your homework to know exactly what that means).

Remember that bonds are for safety, not adventure!

Artsdoctor

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Artsdoctor
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Re: Suze Orman AND Individual Municipal Bonds

Post by Artsdoctor » Sat Nov 16, 2013 10:00 pm

Ned,

I re-read your post, and perhaps your family did better than you thought. If your grandfather bought many of his munis at a premium, the principal would have been amortized over time. If the sales price was the same as his original price (and he had all those years of interest), it might not have been as bleak you think. All that said, when you sell a bond, you will once again pay for that privilege through sometimes large bid-ask spreads. And if the bonds have a long maturity it will be even more difficult to unload them.

Suze Orman is not doing the average investor without fixed income experience any favors by recommending individual munis.

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nedsaid
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Re: Suze Orman AND Individual Municipal Bonds

Post by nedsaid » Sat Nov 16, 2013 10:00 pm

Thanks Artsdoctor for your post. I am going on the experiences of two family members. My bond investments have been through mutual funds with the exception of zero coupon treasuries in the 1980's. I also purchased a brokered CD once.

I am also going off of discussions with my broker, who has been independent for about 15 years. He is rather experienced in the bond market and has answered many of my questions.

There are Bogleheads such as yourself that has experience with individual issues. I am not saying that individual issues can't be done, only that there are pitfalls.

I hope other Bogleheads that own individual issues will post and educate the rest of us. There are places you can go to buy municipals and get good help. Not having experience myself in individual issues, I would not attempt to steer you.

The major mutual fund families have brokerage arms including Vanguard. These brokerages all have bond desks which could be of help to you. I hope other Bogleheads will comment on this.
A fool and his money are good for business.

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nedsaid
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Re: Suze Orman AND Individual Municipal Bonds

Post by nedsaid » Sat Nov 16, 2013 10:07 pm

Artsdoctor, your point about premiums is a good one. I only saw the statements after my Grandfather's death, so I am unaware of whether these were purchased at a premium or discount. I was just surprised there was no profit on the sales of those bonds after the drop in interest rates. You are also correct that the bid/ask spread and the commissions were paid twice on those bonds. What I could see was the purchase price and the sales proceeds.

So the issue of buying bonds at a premium or discount is another issue that a potential buyer should be aware of. This is what I mean that bonds are not as simple of an investment as what people perceive. They can be rather complex instruments.

This is what I like about this forum. I have learned so much from the back and forth in these threads.
A fool and his money are good for business.

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Tycoon
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Re: Suze Orman AND Individual Municipal Bonds

Post by Tycoon » Sat Nov 16, 2013 10:15 pm

Suze Orman is not doing the average investor without fixed income experience any favors by recommending individual munis.
Agreed!
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Re: Suze Orman AND Individual Municipal Bonds

Post by Call_Me_Op » Sun Nov 17, 2013 9:59 am

There is no free lunch with bonds (or any other investments). The 10-year treasury is yielding 2.71% now. Muni bonds normally yield less, because of their tax advantage. Suze claims that you can now find muni's in the 5%-6% range, tax-free. If this is so, they must be very long and lower quality, and perhaps have additional risks. Did she tell her viewers that they can lose their entire principal if a bond issuer goes bankrupt and prioritizes payments to other obligations? [I watched the episode, and the answer is no.]

This is an odd recommendation to an audience that is generally clueless about investing and frequently drowning in credit card debt.
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Artsdoctor
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Re: Suze Orman AND Individual Municipal Bonds

Post by Artsdoctor » Sun Nov 17, 2013 11:59 am

There are some things that she has been good at. A lot of people (certainly not on this forum!) have used and abused money to their detriment. She's caused people to examine the ROLE of money and what it symbolizes. I think she aims for financial independence, or at least teaching people how to be more financially independent.

But I have never understood her distaste for bond funds. She has a career in finance and should know the academic data. If she told people to buy individual treasuries at auction online and buy CDs for the rest of their fixed income needs, I could see her reasoning. But to tell investing novices to buy individual munis is just plain wrong.

I would imagine right now there are people looking online to find those munis yielding 5-6%. I shudder to think about those 30-year Chicago revenue bonds that are going to be bought tomorrow!

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